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HUD’s Insurance Obsession

It is arguable that America never needed a federal "Department of Housing and Urban Development," notwithstanding Congress’s decision to create one in the 1960s. But whatever the rationale for HUD’s existence thirty years ago, the agency’s conduct during the Clinton Administration demonstrates the need for more vigorous oversight by the 106th Congress.

Last December, a federal judge ruled that in 1992 HUD illegally harassed three Berkeley, California, residents who publicly opposed the agency’s plan to locate a homeless center in their neighborhood. But Congress and the courts have done nothing to check HUD’s relentless campaign to assert "fair housing" enforcement authority over the insurance industry—an authority that Congress has expressly declined to confer upon the agency. Throughout the 1990s, HUD doled out millions of dollars to advocacy groups to conduct tests for unlawful discrimination in homeowners insurance underwriting. In 1993, then-Assistant Secretary Roberta Achtenberg directed HUD lawyers across the country to build discrimination cases against insurers by using "disparate impact" analysis, according to which the use of objective, risk-based underwriting criteria would be presumptively illegal if it negatively affected a higher percentage of minority homeowners than white homeowners.

It’s a safe bet that HUD was seeking a justification to further intervene in the insurance marketplace when in 1995 it commissioned the non-partisan Urban Institute to perform a $650,000 study entitled, "Testing for Discrimination in Home Insurance." Researchers selected New York and Phoenix for representative case studies. But to the manifest surprise of its authors, the ensuing report found "little evidence of a pattern of discrimination by insurance agents when providing quotes to homebuyers in minority neighborhoods." HUD was so disappointed that it declined to publish the report, burying it instead in an obscure corner of its Internet website.

Indeed, HUD sat on the Urban Institute report even as Nationwide Insurance Company was being sued for alleged discrimination in Richmond, Virginia, on the strength of "tester studies"—employing pairs of black and white volunteers who call agents and request quotes for homeowners insurance—of the sort used by the Urban Institute researchers. The Richmond tests, however, were methodologically flawed, a fact Nationwide’s lawyers might have been able to demonstrate at trial had the Urban Institute report been available. Without the report, the jury found Nationwide guilty last October, and ordered it to pay $100.5 million in damages to Housing Opportunities Made Equal (HOME), the HUD-financed advocacy group that brought the suit. News of its client’s legal victory prompted an ebullient HUD Secretary Andrew M. Cuomo to pronounce the verdict "good news not just for minorities, but for inner-city neighborhoods that have suffered far too long from redlining and other forms of discrimination."

Three weeks after the Nationwide verdict, the Urban Institute report was finally published—by the Urban Institute. For its part, HUD strained mightily to vitiate the study’s impact even as it tried to suppress it. Before the final draft was complete, the agency recruited Gregory Squires, an inveterate "fair housing" activist, to rewrite portions of the report, playing down its findings. In a foreword to the findings posted on the Internet, Deputy Assistant Secretary Paul A. Leonard wrote that the study had several "key limitations"—e.g., it was "limited to first-time homebuyers in only two cities" and explored only the "first stage" in securing homeowners insurance. A HUD spokesman told the Journal of Commerce that the report was merely "a pilot study" that "didn’t deserve the profile we give to major studies." Moreover, he added, the study was based on "research testing, not enforcement testing, which has yielded evidence of discrimination."

All of which raises two obvious questions. First, if the study was designed to yield such meaningless results, why did HUD spend $650,000 of taxpayers’ money to fund it? And second, suppose the study had found clear and convincing evidence of insurance discrimination in New York and Phoenix—as HUD had surely expected. Would Messrs. Squires, Leonard, et al. have dismissed it as insignificant? To the contrary, they would have trumpeted the results as definitive proof of a major social ill, the solution to which lies in further expanding HUD’s enforcement powers.